Iran Finalizes €2.2b Rail Deal With China’s CMC

EghtesadOnline: Iran has finalized a €2.2 billion deal with China National Machinery Import and Export Corporation, known as CMC, to electrify a 926-km railroad from Tehran to the northeastern city of Mashhad, a deputy minister of roads and urban development said.

News ID: ۷۷۶۳۹۰

21 May 2017

“Two-thirds of the contract are financed by the Chinese government with a very low-interest rate. And the remaining one-third is covered by Chinese insurer Sinosure (China Export and Credit Insurance Corporation Asghar Fakhrieh-Kashan, who oversees Iranian firms’ talks with international businesses, told Financial Tribune in an exclusive interview.

“Issues regarding the government guarantees were resolved during Minister of Economic Affairs and Finance Ali Tayyebnia’s recent visit to China,” he added.

Tayyebnia arrived in the Chinese capital Beijing last Saturday to represent Iran in the New Silk Road summit, formally known as the “Belt and Road Initiative”. He met with senior Chinese officials, including his counterpart Xiao Jie and Chairman of China Banking Regulatory Commission Guo Shuqing, Financial Tribune reported.

"Only drafting and other paperwork remains," Fakhrieh-Kashan said, announcing that CMC representatives will be in Iran in June to sign the contract.

“This is an important project that raises the operational speed of the line to 200 km/hour, meaning passengers can travel from Tehran to Mashhad in about four and a half hours.”

A subsidiary of China General Technology Group, CMC is an international engineering contractor in transportation infrastructure, industrial facilities, and power plants. In 2014, the company constructed the Ankara-Istanbul high-speed railroad, together with China Railway Construction Corporation Limited and Turkish companies.

Iran’s MAPNA Group is “the main domestic subcontractor”, Fakhrieh-Kashan said.

The Iranian holding signed a preliminary deal in October 2016 with Germany’s Siemens for the joint manufacture of 70 electric locomotives to be used in Tehran-Mashhad route.

Tehran-Qom-Isfahan High-Speed Line

Among other major railroad projects Iran is carrying out with the help of international companies, Fakhrieh-Kashan referred to a high-speed line from Tehran to Qom and Isfahan, for which Iran has already signed a contract with China Railway Group Limited known as CREC.

Although the contract, which is currently in effect, was signed in 2015 with an estimated value of €1.8 billion, its scope and value are expected to expand.

Minister of Roads and Urban Development Abbas Akhoundi has ordered the redesign of the route to make it more efficient and remove the flaws the ministry detected in the previous design, including the location of the train stations in Tehran, Qom and Isfahan.

“The contract has been signed, the letters of credit are open and work on 11 construction sites is currently underway,” Fakhrieh-Kashan said.

CREC is a Chinese construction company listed in Shanghai and Hong Kong stock exchanges. The major shareholder of the company is the state-owned China Railway Engineering Corporation.

By revenue, CREC was the largest construction company in the world in the 2015 Engineering News-Record "Top 225 Global Contractors".

Iranian Airlines Scramble to Renew Fleet

As for Iran’s aviation deals, the official said international planemakers are in talks with Iranian airlines to supply them with new passenger aircraft, in addition to the orders they have secured with flag carrier Iran Air.

Noting that "Iran Air’s shopping list is complete", he said from the 400 aircraft needed by Iran in the next 10 years, 200 will joint Iran Air's fleet.

Iran Air has signed tens of billions of dollars worth of contracts to buy 80 planes from Boeing, 100 from Airbus and 20 from ATR. The agreement with ATR stipulates the addition of 20 more planes in the future as an option.

The flag carrier has so far received three Airbus and four ATR jets. The first Boeing is expected to be delivered in April 2018.

“Other Iranian companies have made requests [to purchase aircraft]. Aseman is the most well known. Two other companies have also contacted us. We are trying to help them by introducing them to Boeing and ATR,” the official noted, without elaborating further.

Iran Aseman Airlines, the country’s third largest carrier after Iran Air and Mahan, signed a memorandum of agreement in March with Boeing to purchase 30 B737-Max passenger jets worth $3 billion based on catalogue prices, with the option of adding 30 more in the future.

Aseman Spokesman Seyyed Amirreza Mostafavi, said in April the deal was pending licenses from the US Treasury Department’s Office of Foreign Assets Control, adding that the airline expected to finalize a contract in three to four months. Boeing said the deliveries would be scheduled to start as of 2022.

Fakhrieh-Kashan said Boeing's representatives are slated to visit Iran in June to hold “serious” talks that he hoped would lead to a contract.

Financing Issues

Financing issues of the aircraft orders have yet to be resolved.

Iran is putting out a tender within a month to finance the deals.

Ten companies from Japan, Norway, Denmark, China, Ireland and Britain have already expressed readiness to participate in the tender.

“We have hired an international legal consultant to prepare the documents. We will send the papers to a number of companies, which we think are eligible to finance the deals,” he said.

“Meanwhile, several companies have contacted us saying they are ready to cooperate.”

Neither the prospective financiers nor the Iranian government is willing to disclose any names to avoid any disruption by western lobbying groups who do not want the deals to succeed.

The financing of these deals hit a rough patch amid major international banks’ fears of being penalized by the United States.

Fakhrieh-Kashan said European banks are still wary, although “banks from China, specifically, and South Korea have expressed interest”.

Saga of Cancelled Boeing Delivery

The deputy minister said in April that Boeing had offered a 777-300ER model, initially ordered by the Turkish Airlines, to Iran Air after the Turkish flag carrier canceled its order ahead of delivery. He added that Iran Air was studying the specifications of the wide-body jet and that a delivery was expected within weeks.

Later that month, Iran Air CEO Farhad Parvaresh announced the cancellation of the delivery, saying his company had welcomed Boeing’s offer and was close to receiving the plane after performing technical and financial assessments, “but the plane was not available anymore”. He did not elaborate.

“Turkish has decided to take back that plane,” Fakhrieh-Kashan told us.

“Our guess is Turkish Airlines changed its mind about pursuing the order due to a decline in the number of tourists in Turkey, but the Turkish government helped the company and prevented the cancellation of the order. It is said that top officials in the Turkish government have decided to solve this problem for the Turkish Airlines.”

Iran's order as per a contract with Boeing includes 50 of Boeing’s narrow-body 737max 8s, 15 wide-body 777-300ERs and 15 777-9s, which are due to be delivered to Iran Air over 10 years.

Fakhrieh-Kashan said Iran is keen to take advantage of similar opportunities once they emerge, as Iran could use the delivered planes as collateral to facilitate the financing of other purchases.